Beyond Brexit

UK Parliament

Financial Services and Markets Bill 2022-23 - Introduced to Parliament - 20 July 2022

The Financial Services and Markets Bill (the Bill) has been published and introduced to Parliament, together with explanatory notes, and has had its first reading in the House of Commons. The publication of the Bill follows the Mansion House speech, delivered by Chancellor of the Exchequer, Nadhim Zahawi, on 19 July 2022 (see further item in General section above).

The Bill makes important updates to the UK’s regulatory framework for financial services. It reflects the outcome of a number of HM Treasury initiatives, primarily its Future Regulatory Framework (FRF) Review, which was intended to address issues relating to legislation and the governance of the financial services regulators that have arisen as a consequence of Brexit. See the item below for a summary of HM Treasury’s response to the consultation on Phase II of the FRF Review.

In short:

• The Bill revokes retained EU law relating to financial services (from dates to be specified) and enables HM Treasury and the financial services regulators to replace retained EU law with rules designed specifically for UK markets, in a way that builds on the UK’s existing approach to financial services regulation.
• It enhances the UK’s existing regulatory regime by updating the objectives of the financial services regulators to ensure a greater focus on long-term growth and international competitiveness.
• The Bill seeks to secure and enhance the UK’s position as an open and global financial hub by providing for the implementation of mutual recognition agreements (MRAs) with the UK’s global partners, and for the UK to recognise equivalent Simple, Transparent and Standardised (STS) securitisations issued by entities outside of the UK;
• It brings stablecoins, a type of cryptoasset, into the scope of regulation when used as a form of payment, paving their way for use in the UK as a recognised form of payment. It also enables technological innovation in financial services by allowing financial market infrastructure (FMI) firms to explore new technologies in temporary pilot schemes and reduces the risk of an incident at a third-party provider which has a systemic impact on the UK financial services sector;
• It seeks to maintain the UK’s position as a competitive marketplace with robust regulatory standards by reforming the UK’s wholesale capital markets regime; giving the Bank of England new tools to mitigate the risks of failure of critical financial institutions; enhancing the UK’s insolvency arrangements for insurers to help authorities to better manage insurers in financial distress; and creating a senior managers and certification regime for a number of types of systemically important firms, similar to the existing regime for banks, insurers and other financial services firms; and
• It introduces measures that support financial inclusion by ensuring people across the UK can continue to access cash with ease; enabling credit unions to offer more products; introducing a regulatory gateway designed to improve the quality of financial promotions; and enhancing protection for victims of authorised push payment scams.

We note in particular that the Bill will establish the legislative framework for the revocation of all EU retained law relating to financial services and a transition to new requirements under the regime established by the Financial Services and Markets Act 200 (FSMA) (see clauses 1 to 7). Schedule 1 sets out a list of the legislative acts that will be repealed under this framework. These include all level 1 onshored EU regulation, statutory instruments that reflect the implementation of EU law, provisions made under EU directives and specified provisions in FSMA. HM Treasury does not expect to commence the revocation of individual parts of Schedule 1 unless the regulators have drafted and consulted on rules that are ready to be enforced. It expects that it will take a number of years to complete the process of revoking retained EU law.

The Bill will also amend FSMA to establish the Designated Activities Regime (DAR) to allow activities related to financial markets to be regulated within a framework that is compatible with a comprehensive FSMA model. This is intended to address the status of the regulation of certain activities, products or conduct that are regulated by retained EU law but that are not FSMA regulated activities. The legislative framework for the DAR will be set out primarily in a new Part 5A of FSMA. HM Treasury will be granted a power to designate activities relating to financial markets, exchanges, instruments, products or investments in secondary legislation, so that relevant activities can be brought inside this framework. It will also be able to set a prohibition against carrying out designated activities, or stipulate that they must take place in accordance with the relevant rules. The FCA will be granted a power to make rules in relation to designated activities within the accountability and objectives framework for financial services regulators.

The Bill is scheduled to have its second reading on 7 September 2022. Apart from certain provisions specified in clause 72, the reforms to be made by the Bill will commence on dates to be appointed by HM Treasury in statutory instruments.

Financial Services and Markets Bill

Explanatory notes

Memorandum from Her Majesty’s Treasury to the Delegated Powers and Regulatory Reform Committee

ECHR Memorandum for the Bill as introduced in the House of Commons

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Collection webpage

HM Treasury

Phase II of the Future Regulatory Framework Review - HM Treasury publishes response - 20 July 2022

HM Treasury has published its response to the second consultation paper relating to Phase II of its FRF Review.

The FRF Review was established to determine how the financial services regulatory framework should adapt to the UK’s new position outside of the EU and how to ensure the framework is fit for the future. It involved two consultations, previously reported in this Bulletin, in October 2020 and November 2021. The first consultation set out an overall approach to the regulation of financial services, built on the existing model under FSMA. The second set out how the government intends to repeal the majority of retained EU law relating to financial services, handing responsibility for setting the direct regulatory requirements on firms to the regulators. That consultation also set out proposals for changes to the regulators’ statutory objectives, enhanced mechanisms for accountability, scrutiny and oversight of the regulators by Parliament and HM Treasury.

In the response, HM Treasury summarises the key themes raised by respondents and sets out the government's final policy position on the reforms.

A significant majority of respondents supported the proposal to introduce new secondary growth and competitiveness objectives for the FCA and the PRA. The government will extend the FRF Review accountability arrangements to the Payments Systems Regulator (PSR), but it does not intend to modify the PSR's statutory objectives on the basis this would effectively be duplicative.

The proposed power for HM Treasury to direct the regulators to review rules where it is in the public interest was generally welcomed, although some respondents requested more clarity on when this power would be exercised.

There was broad agreement that the proposed requirement for the regulators to publish and maintain frameworks for how they review their rules will provide improved transparency to stakeholders.

The government will take powers to set ‘have regards’ that the regulators must consider when making rules in specific areas of regulation and to place obligations on the regulators to make rules in specific areas of regulation.

The government is legislating for the FRF Review reforms through the Financial Services and Markets Bill 2022-23, which was introduced to Parliament and had its first reading in the House of Commons on 20 July 2022, as noted in the item above.

See also the Securities and Markets section for an item on HM Treasury’s response to its January 2022 consultation paper on a revised regulatory framework for central counterparties (CCPs) and central securities depositories (CSDs) as part of the FRF Review.

HM Treasury response to FRF Review

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HM Treasury and The City of London Corporation

Annual review of UK financial services - HM Treasury and the City of London Corporation publish first report - 21 July 2022

The Treasury and the City of London Corporation have published the first annual report on the attractiveness and international competitiveness of the UK financial services sector. The report compares the performance of the UK’s financial services sector to those of other major economies and identifies potential areas for reform.

Acting on Lord Hill’s recommendation in the 2021 UK Listing Review, the report aims to provide a comprehensive, evidence-based diagnostic of the state of the UK financial services sector. It is divided into chapters focused on six individual themes that represent financial services policy priorities for the UK. The policy priorities and related recommendations include:

• an open and global financial hub: the UK should remain aligned with global standards and seek outcomes-based trading relationships with global markets. It should also introduce regulation that is better tailored to its domestic markets;
• an integrated eco-system driving growth across the UK: given that the UK has a dense network of expertise and a co-location of banking, insurance, investment management, accounting, legal services, consulting and other related activities, it is hoped that a ‘common sense of purpose’ and a strong culture that identifies opportunities can be shared across government, regulators, trade associations and firms within the financial services sector;
• a once-in-a-generation opportunity to become more nimble, agile and proportionate: through the Future Regulatory Framework review and the introduction of the growth and international competitiveness secondary objective for the FCA and PRA, regulatory frameworks in the UK can stay agile, coherent and competitive, while delivering better outcomes for consumers and businesses;
• a sector at the forefront of innovation: to drive the adoption of technology across the financial services sector, scale businesses and deliver further growth, the right policy support and culture change will be required;
• a sector greening the world’s financial system: the UK should develop and strengthen a market where global participants can find the fullest spectrum of services and products; and
• a sector with access to the right talent and expertise: the UK should remain attractive to highly skilled international talent and continue to provide expertise across the economy.

The report acknowledges that the UK remains a ‘hugely successful financial centre’ and that in order to maintain this position, the government, industry and regulators ‘must continue to work collaboratively and to constructively challenge each other’.

Report: State of the sector: Annual review of UK financial services 2022

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